In a broader sense it includes near cash assets like marketable securities and times deposits in banks. The distinguishing nature of this king of assets is that they can be converted into cash very quickly. Cash in its own form is an idle asset. Unless employed in some form or another, it does not earn any revenue.
Cash management is concerned with
(A) management of cash flow into and out of the firm,
(B) cashmanagement within the firm and
(C) management of cash balances held by the firm – deficit financing or investing surplus cash.
Cash management tries to accomplish at a minimum cost the various tasks of the various tasks of cash collection, payment of outstanding s and arranging for deficit funding or surplus investment. It is very difficult to predict cash flow s accurately. Generally, there is no correlation between inflows and outflows s at some points of times, cash inflows. At some points of some points of time, cash inflows because of the seasonal nature of product sale thus prompting the firm to resort to borrowing and sometimes outflows may be lesser than inflows resulting in surplus cash. There is always an element of uncertainty about the inflows and outflows. The firm should therefore evolve strategies to manage cash in the best possible way. These can be broadly summarized as:
Cash planning: cash flows should be appropriately planned to avoid excessive or shortage of cash.Cash budgets can be prepared to aid this activity.
Managing cash flows: the flow of cash should be properly managed steps to speed up cash collectionand inflows should be implemented while cash outflows should be slowed down.
Optimum cash level: the firm should decide on the appropriate level of cash balance. Balance should be stuck between excess cash and cash deficient stage.
Investing surplus cash: The surplus cash should be properly invested to earn profits. Many in very investment and avenues to invest surplus cash are available in the market such as bank short term deposits, T-bills, inter corporate lending etc.
The ideal cash management system will depend on a number of issues like, firm’s product, competition, and collection program delay in payments availability of cash at low rates of interests and investment opportunities available.
Objectives of cash management
This can be studied under two heads: (A) meeting payments schedule and (B) minimize funds committed tocash balances
Meeting payments schedule
: in the normal cause of functioning, a firm will have to its employees, suppliers,infrastructure bills, etc. it will also receive cash through sale of its products and collection of receivables.Both these do not happen simultaneously. A basic objective of cash management is therefore to meet the payment schedule in time. Timely payment will help the firm to maintain its creditworthiness in the market and to foster good and cordial relationships with creditors and suppliers. Creditors give a cash discount if payments are made in time and the firm can avail the discount as well. Trade credit refers to the credit extended by the supplier of goods and services in the normal cause of business transactions. Generally, cash is not paid immediately for purchases but after an agreed period of time. There is deferral of payment and is a source of finance trade credit does not involve explicit interest charges, but there is an implicit cost involved.
Minimize funds committed to cash balances
Trying to achieve the second objective is very difficult. A high level of cash will help the firm to meet its first objective discussed above, but keeping excess reserves is also not desirable as funds in its original form is idle cash and a non-earning asset. It is not profitable for firms to keep huge balances. A low level of cash balances may mean failure to meet the payment schedule. The aim of cash management is therefore to have an optimal level of cash by bringing about a proper synchronization of inflows and outflows and check the spells of cash deficits and cash surpluses. Seasonal industries are classic examples of mismatches between inflows and outflows.
